The For-Profit Education Sector is Becoming Weaker!

Piyanka is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Apollo Group (NASDAQ: APOL) reported its first quarter results for the year 2013 after the bell on Jan. 8. Surpassing analyst estimates, the company reported revenues of $1.055 billion and adjusted earnings of $1.22 per share.

Apollo Group is a private education provider that offers educational programs both online and on-campus at the Undergraduate, Master’s, and Doctoral levels through its wholly-owned subsidiaries.  Along with its subsidiaries, it offers doctoral degrees and various programs worldwide.

With around a 33% decline in student enrollment, the company saw its shares get crushed by 66% over the last year. Shares of the company sank 7.8% or $1.63, on the Nasdaq. Apollo Group, the education company behind online school The University of Phoenix, has seen weaker-than-expected enrollments in the last fiscal year and has declined significantly. Worries about Apollo’s accreditation and growth prospects helped stoke a sell-off in the stock last Wednesday.

Declining revenue with Dropping Enrollments

Apollo has lost two-thirds of its market value in the past year. Decreased student enrollment was reported for three quarters in a row, dropping by 15%. The company has now shifted its focus from restructuring and getting its costs under control to putting more emphasis on newer enrollments. Since last year enrollments have been dropping year-after-year at the rate of 14% and have now reached close to the bottom line.

Apollo is therefore taking necessary actions to overcome this deficit. The tuition freeze, increase in grants, and increased marketing expenses that caused Apollo to lower guidance are all focused on achieving the company’s enrollment goal.

A Good Risk for Investors

Although revenue has declined significantly, Apollo has been able to maintain respectable profit margins. The midpoint of Apollo’s lowered revenue guidance is $3.7 billion.  Assuming profit margins decline to 9% over the next few quarters due to increased investment in enrollment, Apollo should still successfully generate $333 million in bottom-line profit. If enrollment does stabilize and revenues begin to grow, there is a lot of upside in the shares. Although the guidance in the latest earnings report was disappointing, the beat on revenues and earnings this quarter should keep the shares from breaking down below support. The overall risk/reward factor makes APOL a buy.

The Darker Side

The for-profit education industry has been under excessive student loan default rates, and is spending more money on marketing than on education. In October, Apollo was in the process of closing 115 of its smaller locations in order to cope up with the lowered enrollments and plunging profits. The company is shutting down 40% of its former square footage, closing 90 learning centers and 25 campuses. Moreover, the company is likely to be placed “on-notice” by its accrediting body.

Apollo’s most recent quarter’s profit topped analyst expectations, but Apollo’s outlook and declining enrollments have raised investor fears that the industry shall be stuck up in its slump for quite some time.

The Final Call !!

Though the for-profit educator handily beat estimates for the quarter, the market is clearly concerned about its future. The company is likely to survive, but investing in it feels a little like reaching for a falling knife.

However, there could be opportunities for Apollo outside North America. Companies such as New Oriental Education (NYSE: EDU) and Kroton are still seeing very good revenue growth prospects in China and Brazil, respectively, and Apollo has the financial resources to build a bigger international component to its business. Getting Global would therefore be a logical move for the company.

Along with its foreign competitors, Apollo also faces stiff competition from some other companies that include Devry Inc. (NYSE: DV). DV initially rose a massive 23% during its first quarter of 2013. However, the growing concern about dropping enrollments has been common. In contrast to Devry and Apollo, Strayer Education (NASDAQ: STRA) sank by 11% during the third quarter of 2012 and is still struggling towards better enrollments.

To sum up, Apollo group has many negatives at the moment, including lower guidance, a steadily decreasing profit margin, a weak industry, and poor stock performance.

We certainly look forward to better investing opportunities.

Piyanka has no position in any stocks mentioned. The Motley Fool recommends New Oriental Education. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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